CDPQ's Helmsman on Navigating the Storm

CDPQ's CEO, Charles Emond, gave an exclusive interview to La Presse's Jean-Philippe Décarie on why he's a helmsman in the storm (translated from French):

The teams of the Caisse de dépôt et placement du Québec have not stood idle since the start of the pandemic as they have been busy thoroughly reviewing the institution's entire investment portfolio and contacting all companies with whom they partnered up with to understand their immediate needs and challenges. “Quebec Inc. as we have known it is changing, and we want to support the new disrupting companies that emerge, ”explains CEO Charles Émond, who took over the Caisse last January, just before the outbreak of the crisis that nobody expected.

When you were appointed last January, I wrote a column in which I explained that you had the attributes necessary to become the helmsman of this enormous liner that is the Caisse de dépôt. I ended my text by wishing you not to have to weather a violent storm. Was that a very bad prediction?

Yes ... Exactly, I was rereading this column yesterday, and even though we were at the end of a cycle, nothing foreshadowed the onset of a crisis like the one we are experiencing. A recession, we can see it coming slowly, but this is a particular crisis that has a major economic impact and which also greatly affects the lives of all people.

Overnight, assets we own - roads, airports, shopping centers - were deserted. Stock markets fell 35% in 23 days but recovered almost everything in less than six months. We did an in-depth review of the Caisse's entire portfolio and we consulted all of our companies to see what we could do for them.

You published your first half results last summer, which showed a loss of $8 billion and declines of 5% of your stock market portfolio, 1% of your infrastructure portfolio and 11% of your real estate investments. Is the situation still as critical today?

Our Real Assets portfolio, particularly infrastructure and private equity, shows great resilience, apart from the transportation portion, which represents 15% of our infrastructure.

In real estate, our retail assets suffered, and we began to reform our shopping centers by selling some of the 25 we operate in Canada and repositioning others. One thing is certain, we must give it time, we cannot transform a $60 billion portfolio in three days.

In Private Equity, you still suffered steep losses with your investment in Cirque du Soleil?

Yes, it's true. It's a loss, and the entire entertainment business is now extinct, but we have recovered with our holdings in health, technology and sustainable manufacturing.

The equity performance you got in the first half of the year was affected by your underweight exposure to big tech companies. Does this still affect you?

For the stock markets, we keep the same approach we had but we do it with different glasses. It is not just the FAAMGs that need to be considered, but how the digitization of the economy is transforming markets.

From an offensive perspective, you have to assess the type of companies in which to invest, and from a defensive perspective, you have to see how emerging technologies can affect our portfolio. These technologies can also serve us better internally by making greater use of advanced intelligence in investing.

It should also be noted that our fixed income portfolio is responding very well. There was a migration to infrastructure and corporate debt two years ago, and it is much more promising than buying a single bond.

You are a speaker this Tuesday at noon at the Chamber of Commerce of Metropolitan Montreal. What message do you want to send to the business community?

There are three, four messages that I want to share, including our vision on the extraordinary economic environment we live in today and on the growing role of technology.

We commissioned a study from KPMG to find out which are the structuring companies today, which are innovative, which allow their clients to evolve and be more productive, which ones invest.

Quebec inc. history is being transformed. CGI, Couche-Tard and Cascades still occupy important places, but there are many SMEs that are in growth sectors, new technology companies that do not have tangible assets.

We want to accelerate the development of our champions such as Nuvei, Medicom, Eddyfi, companies which are making technological leaps for their customers like Lightspeed or Dialog, which has made breakthroughs in telemedicine.

Same thing with our investment in the Réseau express métropolitain (REM), we are doing it because it will improve the quality of life for people who travel downtown.

In this regard, you have just signed with seven other major Canadian pension fund managers a declaration in favor of greater and better disclosure of environmental, social and governance (ESG) issues for companies. Why did you participate in this process?

By uniting our voices, we want to give more strength to a multitude of initiatives that we have taken individually. We want better measures of ESG issues, standardization in the disclosure of these elements, with a view to better transparency. This is done with environmental and governance standards, but the social issues are growing. It should be taken into account better.

You have been the subject of virulent criticism from the CEO of Garda, who accuses you of having invested in the security firm Allied, which wants to make an offer on the firm G4S, which is criticized for its disastrous record in ESG subject. How do you respond to these accusations?

First, as we speak, there is no offer from Allied on G4S, there are intentions, but there is only one offer and that is Garda's. The Caisse does not skimp on ESG impacts, we have a large team that goes through each of the companies in which we invest.

We do not have malleable ESG criteria. Are there any fixes that need to be made to any issues, it is possible. There may be activities that she would be required to abandon. We do not compromise on this, it is the Caisse's worldwide reputation that is at stake.

A word in closing on three of your major holdings in Alstom, SNC-Lavalin and the McInnis cement plant. Where are you in these files?

We are very satisfied with the transaction with Alstom, which will make us the primary shareholder with 18 to 19% of the shares of this large rail transport group, the second largest in the world behind the Chinese. The transaction cost value is $4 billion, which will make it the largest investment in the Caisse's overall portfolio.

We are a patient investor in SNC-Lavalin and we agree with the strategy of repositioning the company, which abandons the engineering-construction sector and natural resources. SNC-Lavalin is a strategic player for Quebec and the development of our infrastructures.

Finally, for our investment in Ciment McInnis, as we have said before and it's worth repeating, it is not the role of the Caisse to be a cement plant operator. We are waiting to find a strategic operator and we are not talking in terms of write-off of assets for this investment.

Alright, good interview with Charles Emond (Émond in French). I used Google to translate the bulk of the article and my high school courses at Collège Notre-Dame to edit it a bit, but for the life of me, I still can't figure out what "sustainable manufacturing" is in private equity (might be referring to renewable energy?).

Anyway, Charles Emond is cursed and blessed. Cursed because just like OTPP's Jo Taylor, HOOPP's Jeff Wendling and OMERS' Blake Hutcheson, he started his CEO mandate right at the outset of a global pandemic. 

Blessed because as he points out, global stock markets have recovered and there he can thank Fed Chair Jerome Powell and other central bankers who unleashed a liquidity tsunami and are backstopping madness. 

It might not end well but for now, global stocks look good going into year-end (it can change on a dime).

But in private markets, Mr. Emond was very forthright, stating retail real estate assets are struggling, as are transportation infrastructure assets.

When you look at the policy responses to the pandemic, they have first and foremost helped liquid markets (stocks and corporate bonds in particular) and left a mess in some sectors of private markets.

Every major Canadian pension fund has some scars from the pandemic: AIMCo's vol blowup, CPP Investments is taking its lumps on Highway 407, OTPP's airports portfolio is getting hit, OMERS's real estate portfolio is exposed and so on and so on, everyone is getting hit.

Now, I'm not too worried about airports over the long run but I'm worried that there's a secular shift going on in real estate and many institutional investors who are only listening to Bruce Flatt, not Bill Gates, are underestimating the long-term impacts on commercial real estate.

I get it, vaccines are coming, but if you think the world is going back to where we used to be last year, you're sorely mistaken. Working from home and working from the office will co-exist and for some tech companies, there will only be working from home (and they set the dominant trend in commercial real estate, not accounting and law firms and not pension funds!).

What about retail malls? No doubt, they got hit the most but they're not dead, all you have to do is drive around to see activity at malls.

Also, I enjoyed reading this Montreal Gazette article over the weekend on why industry experts insist fears of a “mallpocalypse” are overblown, as long as shopping centres adapt to the new normal:

“I still believe in malls,” Peter Simons, chief executive of the Quebec City-based clothing retailer that bears his family’s name, said in an interview. “Malls, in terms of discovering new things, have a lot of potential. It’s getting very expensive to break though all the noise on the web. Perhaps malls have to surprise you to make it worth going to.”

Vincent Chiara, CEO of developer Mach Group Inc. and owner of properties such as Laval’s Centre Duvernay, shares Simons’ faith in the shopping centre model — so much so that he’s on the lookout for additional assets.

“Brick and mortar shopping isn’t about to disappear, and neither are malls,” he said in an interview. “Malls are moving from being fashion centres to becoming service centres. We see more services to the people. We see pharmacies, clinics, and now supermarkets in malls. The model has changed a lot, and it will continue to change.”

Read the entire article here,  it's raises excellent points on malls. 

My own feeling? People don't go to malls just to shop, they go to escape from the routine of life, which is why malls are still busy despite the pandemic (they're fed up of COVID but we are just entering a dark winter and need to be extra vigilant over the next three months).

Anyway, all this to tell you Charles Emond is dealing with a lot of things as are his peers at Canada's large pensions but he also inherited some problems from Michael Sabia.

Don't get me wrong, Sabia did great things at the Caisse and I told him that when I met up with him at a Christmas party we were both invited to last year. I also told him "you were the luckiest Caisse CEO by far" and he agreed with me as he brushed his forehead.

But he failed to really dig dip into the Caisse's massive real estate portfolio and he had way too much confidence and praise for Daniel Fournier, the former CEO of Ivanhoé Cambridge. 

Looking back now, Fournier might have inherited a retail legacy portfolio from his predecessors but he certainly didn't do enough to trim this massive exposure.

That job is now the responsibility of Nathalie Palladitcheff, the current CEO of Ivanhoé Cambridge who has taken massive writedowns on retail assets.

Again, I want to be crystal clear, Michael Sabia did many good things at the Caisse (bolstered risk, governance, ESG investing and diversity and inclusion) and Ivanhoé Cambridge posted solid returns while Daniel Fournier was at the helm but it was a bit of smoke and mirrors.

In my opinion, Sabia put way too much trust in Fournier and should have done an independent and detailed analysis of the Caisse's real estate portfolio from the onset to really understand the risks of that portfolio (not that they could have predicted a global pandemic).

And now it's up to Charles Emond and Nathalie Palladitcheff to clean up that huge mess and as Emond states above, it will take time to restructure and reposition a $60 billion real estate portfolio, you can't do it overnight.

Another legacy investment Emond inherited is the $6.3 billion Réseau express métropolitain (REM), what many call Michael Sabia's "baby" or "brainchild".

To be sure, doing a massive greenfield infrastructure project of this scale was unique and placed the Caisse ahead of all its peers in greenfield infrastructure, but it had its risks, and the pandemic wasn't the only one.

Thank God it's still being built and not operational because it would have been empty light rail cars going to downtown Montreal during this pandemic.

Lately, the REM has hit a few snags. Jason Magder of the Montreal Gazette recently reported that an unexpected explosion could delay REM project up to 18 months:

The builders of the Réseau express métropolitain revealed on Wednesday that leftover explosive material from the century-old Mount Royal tunnel’s original construction detonated in July.

No workers were injured by the explosion, which along with the pandemic, has meant that construction of the Mount Royal tunnel portion of the project will be delayed by up to 18 months.

“People in general are disappointed, but no one is really very surprised (about the delay),” said Francis Millaire, a spokesperson for commuters using the Deux-Montagnes train line, which has pushed the government to improve its plan for alternative transit service during the tunnel closure. “This is why we were so concerned about mitigation measures, because everyone knew this would impact our lives for a long period of time.”

Service on the Deux-Montagnes Line from Bois-Franc to Central Station was stopped in May when the tunnel was closed to be refurbished, as two stations will be built underground — connecting to the McGill and Édouard-Montpetit métro stations.

The explosion happened in the tunnel near Town of Mount Royal on July 21 when heat from drills came into contact and ignited explosive material left over from the tunnel’s original construction in between 1912 and 1918.

Work was interrupted until recent days so that new safety measures could be put in place for workers, Jean-Marc Arbaud, the managing director of CDPQ Infra, told reporters in a briefing. REM builders worked with officials from the province’s workplace safety board, the CNESST, to put in place the additional safety measures, because there remains a risk of further explosions, CDPQ Infra officials said.

When asked why CDPQ Infra — a division of the Caisse de dépôt et placement du Québec — didn’t reveal information about the explosion sooner, CEO Macky Tall said because it was a minor incident that didn’t have much of an impact.

“Immediately after the event happened, we notified the competent authority, which was the CNESST. We worked with them and independent experts to develop a safe and secure work plan,” Tall said. “This unexpected incident, when it happened, caused no injury and had no impact.”

Millaire said CDPQ-Infra should have notified the public as soon as the explosion occurred.

“There is still obviously a lack of transparency,” he said. “Why did it take so long between July and now to announce this? To me, this isn’t news that should have waited.”

He said the lack of transparency doesn’t help win public support for the project.

“We have always felt that some things have not been communicated how they should have been, and after hearing this news, how confident can we be that this current delay will be the last one?”

When you're building a multi-billion dollar light rail project going through a tunnel that was made 100 years ago, you're bound to run into a few "bombs".

Thank God this happened now and not when the REM will be operational. I heard this tunnel was always a huge fire hazard and Montrealers would have been appalled at its state if they knew the truth.

Now what? Well, they will need to use robots to find uncharged explosives (happens often in major construction projects) and it will delay the project, by how much is anyone's guess.

If you ask me, delays are good right now, as long as they're not too costly.

But the tunnel explosion isn't the only snag the REM is running into.

Two weeks ago, Annabelle Olivier of Global News reported that uncertainty surrounds construction of future REM train station at Montreal’s Trudeau airport:

Uncertainty continues to surround a proposed Réseau express métropolitain (REM) train station at Montreal’s Trudeau airport. The light rail network, once finished, should include 67 km of tracks that link Montreal, the south shore, the West Island and the north shore.

The ongoing pandemic, however, is causing some setbacks.

In August, Aéroports de Montréal (ADM) announced it was suspending all construction projects that didn’t protect the integrity of its assets, citing, at the time, “almost non-existent revenues.” ADM had previously announced that it would fund the construction of the train station in order to ensure airport access along the light rail network.

But in August, ADM said it would have to continue in “planning mode” until  it could secure a “tailored loan” from various levels of government.

On Thursday, however, the Quebec government indicated that while it supports the building of the train station at the airport, it has already made a substantial contribution to the REM project as a whole.

A spokesperson for Transport Minister François Bonnardel said the government has already invested $1.28 billion in the REM, not including $192 million for the implementation of mitigation measures, while Hydro-Québec has also contributed $295 million.

“At this stage, we believe that efforts can still be made by the Montreal airport, which falls under the purview of the federal government and not of the Quebec government, in the search for a solution for the financing of this project,” said spokesperson Florence Plourde in an email to Global News.

ADM spokesperson Anne-Sophie Hamel said it wouldn’t be commenting as “the information has not yet been confirmed officially to ADM” by the Quebec government, “with whom we have been negotiating for more than five months.”

Hamel said the airport authority has been in negotiations with both levels of government in a bid to secure a loan, which is crucial to the financing of the project, seeing as ADM is anticipating revenue losses of around $600 million for 2020 alone.

“If it does not get a loan, ADM does not see how it could finance the construction of the REM station at the airport, without deviating from its primary mission as an airport authority,” she said.

Despite the setback, Hamel said ADM remained confident it would find the financial backing it needs in order to meet its obligations towards the REM project.

At a news conference on the province’s response to COVID-19 measures, Premier François Legault argued that having a train station at the airport was critical but reiterated it wasn’t the provincial government’s responsibility to pay for it.

“It has to be payed by the owner. The actual owner, ADM, or the preceding owner which was the federal government, he said.

“It doesn’t make sense that a big city like Montreal doesn’t have a station at their main airport. We can bring the REM to the airport but the station has to be paid either by ADM or by the federal government.”

In an email to Global News, Federal Transport Minister Marc Garneau expressed his consternation.

“We were disappointed to learn that the government of Quebec has withdrawn from the Montreal airport station project after several months of work in collaboration with our government,” wrote Amy Butcher, a spokesperson for the minister.

“It is imperative that a solution be found given the importance of the airport station for this entire public transit project, a project that will improve mobility for citizens and visitors to the Greater Montreal area for generations to come.”

The mayor’s office also expressed disappointment.

“The withdrawal of a financial partner at this stage of the project could jeopardize its implementation and the success of the project,” said Youssef Amane on behalf of Montreal Mayor Valérie Plante.

The news also comes as a surprise to Montreal’s Metropolitan Chamber of Commerce. The group has long supported the creation of a link between downtown Montreal and the airport.

“We were all caught by surprise and that should not happen for a project of this magnitude and this strategic importance,” said Michel Leblanc, CEO for the Chamber of Commerce.

Leblanc’s take on the situation is that it could be a negotiating strategy on the part of the provincial government. Ultimately though he believes that since the airport is part of federal infrastructure, the federal government should be offering the loans to airport authorities to help pay for the construction of the future train station.

Alright, let me give you the quick scoop on this.

Aéroports de Montréal (ADM) which manages the Montreal Trudeau International Airport, is a federally regulated entity. 

Some industry experts told me "it's terribly managed" but still a "cash cow for the federal government because of user fees". Others have told me "its governance is shoddy leaving it exposed to corruption" and "there's no accountability whatsoever". 

This is important background that needs to be noted.

Anyway, CDPQ Infra was in charge of building the REM and extending the line till the airport but it was up to the ADM to build the REM airport station and let me be crystal clear, it is and remains the responsibility of the federal government to provide the financing for this station. 

I have no idea why Federal Transport Minister Marc Garneau expressed his consternation over the fact that anything built on the Montreal airport's site falls under the purview of the federal government.

Indeed, yesterday, the federal government balked, announcing it will provide the funding for the REM airport station (see clip below).

In my opinion, the federal government should also sell a majority stake in all the major airports in this country to Canada's large pensions and global investors and get out of managing our airports (remain a minority shareholder).

I have zero trust in the entities managing our airports now, ZERO!!

It's high time the federal government get out of managing airports, forgo the user fees but collect a lump sum payment and use it to pay down the massive $400 billion federal deficit it has accumulated because of the pandemic.

This will be a win-win for all Canadians and give the Bank of Canada a break from monetizing all that federal debt.

But what do I know, I'm just a well read pension blogger, not a federal politician.

By the way, before I admonish the Trudeau Liberals, what was the former leader of the Conservative party, Andrew Scheer, thinking when he recently fired missiles at the Canada Infrastructure Bank on Twitter:

After almost four years and with an allocation of $35 billion, the Canada Infrastructure Bank has completed ZERO projects. When I asked the Infrastructure Minister about it, she refused to answer the question. #canpoli #infrastructurehttps://t.co/aXkQxAz60j

— Andrew Scheer (@AndrewScheer) November 25, 2020

Mr. Scheer needs to get his facts straight, the Canada Infrstructure Bank funded the REM project, it was its first major investment (no thanks to the folks at CDPQ Infra).

Having said this, I don't know much about Ehren Cory, CIB's new CEO, but one criticism I keep hearing about the Canada Infrastructure Bank is they continue to hire people with no revenue risk transactions under their belt, only people who know theory but lack a lot of practical experience. 

Hopefully Mr. Cory will change that and hire more senior people with practical experience in revenue risk transactions,

Michael Sabia, where are you? As the Chair of the Canada Infrastructure Bank, please give me a call so I can give you an earful (what, you think only Sabia is allowed to huff and puff?!?).

Alright folks, I'd better stop there as I tend to ramble on, makes the pension elite a bit uncomfortable.

Below, where one government has left off, the other has picked up. The federal government announced on Monday that it plans to provide most (but not all) of the funding to build the REM light-rail train station at Trudeau airport. Global’s Tim Sargeant reports.

I'm glad the feds came to their senses but I'm surprised they refuse to cover the full $600 million, only $500 million. What's $600 million when you can add it to the $400 billion deficit? (Maybe someone tipped off the feds that the ADM can't be trusted and the $600 million figure is highly inflated).

In all seriousness, all major airports in this country are federally regulated and fall under the federal government's purview, for better of for worse. I'd rather see them owned by our large Canadian pensions but admittedly, with airport traffic down 90% and revenues collapsing, now is not the time to sell.

I will try to embed Charles Emond's address to The Chamber of Commerce of Metropolitan Montreal if it becomes public but you can watch a replay by registering here (must admit, I haven't seen it yet).